Monday, January 20, 2003

As you may have noticed, the critics of President Bush's new tax cut package claim it is a sop to the rich. This charge makes us wonder if they've even read the plan. The truth is that the Bush proposals would make the tax code more progressive, not less. And this isn't altogether a good thing.

The soak-the-rich facts, if any journalists cared to look, are contained in the income distribution tables on the plan compiled by the Treasury Department. Looking at the impact for 2003, Treasury finds that the average reduction in income taxes is a touch more than 12%. But for those who make less than $30,000 the average reduction is about 17%, while for those who earn more than $100,000 it is 11.4% or less. (See the table below.)

There's even better news for modern Robin Hoods. Because the percentage reduction for families with incomes under $50,000 is greater under the Bush plan, those families would pay a smaller share of the total income tax than they do under current law.

Tax Cuts for the PoorLower earners would get a larger percentage income tax cut on average under the Bush plan.IncomePercentage reduction0-$30,000 17.0%30-40,000 20.1%40-50,000 14.5%50-75,000 11.4%75-100,000 13%100-200,000 11.4%200,000-plus 11.2%Total 12.3%Families with incomes over $100,000 would end up paying a larger share of the total income tax. These families would pay 73% of all federal income taxes. Not to put too fine a point on this income redistribution, but taxpayers with incomes over $200,000 could expect on average to pay about $99,000 in taxes under Mr. Bush's plan.

How could this happen? Mr. Bush would relieve 3.8 million lower-income taxpayers from paying any income taxes. The chief tax remover comes from his proposal to accelerate the increase in the child credit to $1,000 from $600, bumping a touch more than three million taxpayers right off the rolls.

No doubt the Bush team proposed this tilt toward lower income taxpayers to mute the class-warrior critics, not that we've noticed any lower decibel level. But one certain consequence is that the plan exacerbates the growing problem of a bifurcated tax system.

We raised this issue several weeks ago, pointing out that the unceasing addition of exemptions, deductions and credits to the tax code was shrinking the tax-paying base. And, as more lower-income people saw tax liabilities fall to zero, more upper-income people shouldered a larger part of the tax burden. We did not, by the way, suggest that lower income people should pay higher taxes. We even went out of our way to flog our favorite horse that everybody should pay less in taxes.

We are merely pointing out the (apparently heretical) truth that the current tax system is very skewed against upper-income Americans. According to IRS data from 2000, the top 5% of tax filers paid more than 50% of total income tax revenue, and the top half of tax filers were responsible for almost all revenue--96% of the total take. This burden on the upper-income holds even when the payroll tax is included in overall distribution tables. (The payroll tax includes the regressive Social Security levy and the 1.45% Medicare tax that applies to every dollar of income.)

The Congressional Budget Office has looked at the distributive impact of various taxes for 1997. The income-tax share of the lowest-income family quintile (the bottom 20%) was negative 1.2% and the share of the highest family quintile was 73.3%. The difference in payroll-tax share was somewhat less dramatic at 3.9% for the lowest quintile and 40.6% for the highest. But when all federal taxes were thrown together, the share of the lowest quintile was 1.6%, while the share of the highest quintile was 60.2%. Karl Marx, call your office.

This super-progressivity comes from two sources: the system of higher marginal-rate brackets for higher income households, and the exclusion of lower income households from any income-tax liability. In 2000, of 129.4 million tax returns filed, about 32 million paid no taxes. Most of these lucky duckies, as we have called them (to some amusing consternation), benefit from tax exemptions, deductions and credits that violate the concept of horizontal tax equity--the notion that people with identical incomes should pay the same amount in taxes.

For instance, the folks at the Tax Foundation have looked at how two single moms--each earning $30,000 a year--would fare under the Bush plan. In 2003, the single mom with one child would pay income tax of $1,028; the mom with two children would not only pay no taxes, she'd also receive a check from the federal government, under the earned income tax credit, for $680. Compared to the single mom who must pay taxes, the single mom who does not is, well, a lucky ducky.

The broader point is that whatever Mr. Bush's tax proposal does for economic growth (and we think it'd do a lot), it gives more proportional benefit to lower-income households. The class warriors should be thrilled.

Why don't people vote their own self-interest? Every few years the Republicans propose a tax cut, and every few years the Democrats pull out their income distribution charts to show that much of the benefits of the Republican plan go to the richest 1 percent of Americans or thereabouts. And yet every few years a Republican plan wends its way through the legislative process and, with some trims and amendments, passes.

The Democrats couldn't even persuade people to oppose the repeal of the estate tax, which is explicitly for the mega-upper class. Al Gore, who ran a populist campaign, couldn't even win the votes of white males who didn't go to college, whose incomes have stagnated over the past decades and who were the explicit targets of his campaign. Why don't more Americans want to distribute more wealth down to people like themselves?

Well, as the academics would say, it's overdetermined. There are several reasons.

People vote their aspirations.

The most telling polling result from the 2000 election was from a Time magazine survey that asked people if they are in the top 1 percent of earners. Nineteen percent of Americans say they are in the richest 1 percent and a further 20 percent expect to be someday. So right away you have 39 percent of Americans who thought that when Mr. Gore savaged a plan that favored the top 1 percent, he was taking a direct shot at them.

It's not hard to see why they think this way. Americans live in a culture of abundance. They have always had a sense that great opportunities lie just over the horizon, in the next valley, with the next job or the next big thing. None of us is really poor; we're just pre-rich.

Americans read magazines for people more affluent than they are (W, Cigar Aficionado, The New Yorker, Robb Report, Town and Country) because they think that someday they could be that guy with the tastefully appointed horse farm. Democratic politicians proposing to take from the rich are just bashing the dreams of our imminent selves.

Income resentment is not a strong emotion in much of America.

If you earn $125,000 a year and live in Manhattan, certainly, you are surrounded by things you cannot afford. You have to walk by those buildings on Central Park West with the 2,500-square-foot apartments that are empty three-quarters of the year because their evil owners are mostly living at their other houses in L.A.

But if you are a middle-class person in most of America, you are not brought into incessant contact with things you can't afford. There aren't Lexus dealerships on every corner. There are no snooty restaurants with water sommeliers to help you sort though the bottled eau selections. You can afford most of the things at Wal-Mart or Kohl's and the occasional meal at the Macaroni Grill. Moreover, it would be socially unacceptable for you to pull up to church in a Jaguar or to hire a caterer for your dinner party anyway. So you are not plagued by a nagging feeling of doing without.

Many Americans admire the rich.

They don't see society as a conflict zone between the rich and poor. It's taboo to say in a democratic culture, but do you think a nation that watches Katie Couric in the morning, Tom Hanks in the evening and Michael Jordan on weekends harbors deep animosity toward the affluent?

On the contrary. I'm writing this from Nashville, where one of the richest families, the Frists, is hugely admired for its entrepreneurial skill and community service. People don't want to tax the Frists -- they want to elect them to the Senate. And they did.

Nor are Americans suffering from false consciousness. You go to a town where the factories have closed and people who once earned $14 an hour now work for $8 an hour. They've taken their hits. But odds are you will find their faith in hard work and self-reliance undiminished, and their suspicion of Washington unchanged.

Americans resent social inequality more than income inequality.

As the sociologist Jennifer Lopez has observed: ''Don't be fooled by the rocks that I got, I'm just, I'm just Jenny from the block.'' As long as rich people ''stay real,'' in Ms. Lopez's formulation, they are admired. Meanwhile, middle-class journalists and academics who seem to look down on megachurches, suburbia and hunters are resented. If Americans see the tax debate as being waged between the economic elite, led by President Bush, and the cultural elite, led by Barbra Streisand, they are going to side with Mr. Bush, who could come to any suburban barbershop and fit right in.

Most Americans do not have Marxian categories in their heads.

This is the most important reason Americans resist wealth redistribution, the reason that subsumes all others. Americans do not see society as a layer cake, with the rich on top, the middle class beneath them and the working class and underclass at the bottom. They see society as a high school cafeteria, with their community at one table and other communities at other tables. They are pretty sure that their community is the nicest, and filled with the best people, and they have a vague pity for all those poor souls who live in New York City or California and have a lot of money but no true neighbors and no free time.

All of this adds up to a terrain incredibly inhospitable to class-based politics. Every few years a group of millionaire Democratic presidential aspirants pretends to be the people's warriors against the overclass. They look inauthentic, combative rather than unifying. Worst of all, their basic message is not optimistic.

They haven't learned what Franklin and Teddy Roosevelt and even Bill Clinton knew: that you can run against rich people, but only those who have betrayed the ideal of fair competition. You have to be more hopeful and growth-oriented than your opponent, and you cannot imply that we are a nation tragically and permanently divided by income. In the gospel of America, there are no permanent conflicts.

David Brooks, a senior editor at The Weekly Standard, is author of ''Bobos in Paradise: The New Upper Class and How They Got There.''

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The following information is provided to help you understand the biases that may be inherent in this blog.My primary U.S. economic policy concern is the fiscal irresponsibility of government.The Baby Boom generation, which I am part of, has spent the past 30 years accumulating massive public debt that will be passed to our children, grandchildren, and subsequent generations.I am not opposed to the reduction or elimination of any government spending program.Yet, politicians tend to call for reduced spending in general terms and fail to publicly declare specific cuts they would make.The primary cause of the massive U.S. public debt is revenue reductions (in the form of tax cuts) without similar decreases in government spending.

I am willing to consider the expansion and addition of government programs as well.I do not mind how much or little the government provides to society as long as it is paid for.I am willing to pay higher taxes for services deemed worthy, whether they be national defense, homeland security, or income assistance to those less fortunate than I.And I am certainly willing to pay less in taxes or to deposit any government check I receive.My generation, the Baby Boomers, has been very good at cutting taxes and increasing the size of government, regardless of which political party is in power.This is a prescription for financial chaos that remains a horrible legacy for future generations.

About Me

I am a professor of economics at Jacksonville University, where I teach courses in introductory economics, comparative economic development, and globalization. I use this blog to keep in touch with my current and former students. Teachers and students at other schools, as well as others interested in economic issues, are welcome to use this resource.